Market conditions, investor sentiment and disposition effect. An empirical study based on China's stock market

Abstract

Using the transaction data of the stock market and financial data of listed companies from 2003 to 2021 in China, we explore the existence form of the disposition effect. Then, we combine the Bayesian learning process with the DSSW model to investigate the disposition effect's size and performance when market conditions differ from investors' irrational beliefs. We find the disposition effect in China is asymmetric V-shaped and negatively correlates with investor sentiment significantly. In addition, affected by sentiment, its performance is opposite in the bull market and bear market. The above research and conclusions have theoretical and practical significance for understanding the disposition effect, optimizing investors' decision-making, and strengthening the capital market infrastructure.

Keywords

• Disposition effect
• Investor sentiment
• Irrational expectation
• Speculative trading